Common Cents # 20 - The Balance Sheet

 

CC # 20 – Balance Sheet

 

Taking a trip these days is made far easier by using GPS and Google Maps to point the way. The big advantage of these over a paper map is that the GPS will tell us where we are right now. Knowing exactly where we are is the key to figuring out how to get to our destination.

In our financial lives, the point we are now is called a Balance Sheet or a Net Worth Statement. The idea is pretty simple. We list the value of what we have and subtract what we owe to get a number which basically tells us where we are now on the financial road to our eventual goal.

We start by listing our assets, what we have. The normal way is to first list current assets or cash. This would be our bank accounts, savings accounts, and even money in our pockets if we love detail. Then we list the long-term assets. This includes the value of our house, cars, furniture, any retirement accounts, and personal items such as jewelry or collections. Add these all up to determine our total assets.

The second part of the balance sheet is liabilities, what we owe. Current liabilities are bills that are due soon, balance on our credit cards and things like that. Long-term liabilities are home loan mortgages, auto loans, student loans, or anything else that we will eventually have to pay.

Subtracting the total of all liabilities from our total assets gives us our “Net Worth.” Think of net worth as what we would have left if we sold everything and paid all of our bills. The amount that would be left is called net worth. Hopefully it is a positive number. It is certainly possible to have negative net worth.

The Balance Sheet is literally a dated snapshot of our current location. Because the numbers are always changing, the Balance Sheet only shows a moment in time. To be the most helpful, we need to update the numbers on a regular basis to see trends, where we are making progress, and where progress has stalled. An annual balance sheet is good, but quarterly or even monthly could be very valuable, especially if we’re just beginning to determine what course of action to take in an area of life. If we use Excel to prepare our balance sheet, the rows would be assets and liabilities and we can use columns for various dates so we can easily see progress in areas like growing retirement accounts, increasing equity in our home and so forth.

An accurate Balance Sheet also helps in setting goals and helps us determine how much money is enough, or perhaps even, how much is too much. We need to ask ourselves if a high net worth may indicate a lack of generosity, insecurity, or missed opportunities.

We can enjoy the journey toward reaching financial goals when we can identify clear progress along the way, comparing where we were, where we are, with our destination in view.